Unit 9 SeminarCash and Receivables

COPYRIGHT © 2010 South-Western/Cengage Learning

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Cash is the lifeblood for companies, and infusions are coming more frequently from nontraditional sources. According to a recent Federal Reserve

Payments Study, noncash payments grew by 4.6% over the previous three years and had a total value of $75.8 trillion. Of these noncash payments, more than two-thirds were made

electronically, with debit cards being the most frequently used electronic payment type.

Show Me the Money!

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Debit and credit cards are used most frequently.

The automated clearing house (ACH) is an electronic network that provides for the interbank clearing of electronic payments.

ACH payments currently represent 91% of the value of all electronic payments.

Show Me the Money!

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Direct deposit of payroll and social security Electronic payments of bills

– Mortgages– Utility bills– Insurance premiums

The conversion of checks by businesses

Automated Clearing House (ACH)ACH payments include:

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Accounts receivable conversion (ARC)– Paper checks received at the bank lockbox are

converted into automated clearing house debits and then the check is destroyed.

– ARC payments are about one-third cheaper than paper checks.

– Float time is cut in half. Check Clearing for the 21st Century Act (Check

21)– Gives legal status to substitute checks– Allows merchants to scan and transmit checks to the

bank

Electronic Banking

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Cash is the resource on hand to meet planned payments and

emergency situations.

Cash

Excluded from Cash

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Cash

Cash

• Coins and currency• Checking accounts• Savings accounts• Negotiable checks• Bank drafts

Included in Cash• Certificates of deposit• Bank overdrafts• Postdated checks• Travel advances• Postage stamps

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Cash equivalents are short-term, highly liquid investments that are readily

convertible into known amounts of cash and so near their maturity that there is little risk of changes in value because of

changes in interest rates.

Cash Equivalents

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Cash Management

The person opening the mail or the salesperson using the cash register should count the receipts immediately.

All cash receipts are recorded daily in the accounting records.

All receipts are deposited daily in the company’s bank account.

Control Over Receipts

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Make all payments by check or electronic payment (except petty cash items) so that a record exists for every company expenditure.

Authorize and sign all checks only after an expenditure is verified and approved.

Periodically reconcile the cash balance in the bank statement with the company’s accounting records.

Control Over Payments

Cash Management

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Those receivables expected to be collected or satisfied within one year or the current

operating cycle, whichever is longer, are classified as current assets; the remainder are

classified as noncurrent.

Receivables

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1. The sales price is known at the date of sale.2. The buyer has paid or will pay the seller, and

the obligation is not contingent upon the resale of the product.

3. The buyer’s obligation to the seller would not be changed by theft or damage to the product.

Each of the following criteria must be satisfied when the right of return exists in order to

recognize revenue at the time of sale.

ContinuedContinued

Receivables

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4. The buyer has an economic substance apart from the seller.

5. The seller does not have significant obligations to help the buyer sell the product.

6. The seller can reasonably estimate the amount of future returns.

ReceivablesEach of the following criteria must be satisfied

when the right of return exists in order to recognize revenue at the time of sale.

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Accounts Receivable

Prenumbered sales invoices Separation of the sales

function from the cash collection responsibilities

Internal Control Procedures for Accounts Receivable

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Sales Discounts Increase sales Encourage prompt payment Increase likelihood of collection

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A 2% discount may be subtracted from the invoice price if payment is made within 10

days, otherwise the total amount is due within 30 days (net of returns and allowances).

2/10, n/30

Calculation of Sales Discounts

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Sales Returns and Allowances When goods are sold that

are found to be defective, the customer may retain the goods and be allowed a reduction in the purchase price. This reduction is called a sales allowance.

When the customer returns good to the seller, the exchange is called a sales return.

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Loss Contingencies1. Information available

prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.

2. The amount of the loss can be reasonably estimated.

GAAP requires that estimated losses from loss contingencies be accrued

against income and…

…recorded as reductions in assets or as liabilities when both of these conditions are

met.

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Estimated Bad Debts Method

Bad debts can be estimated based on sales or on accounts

receivable.

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1. Relationship to sales (income statement approach): Percentage of sales Percentage of net credit sales

2. Relationship to accounts receivable (balance sheet approach): Percentage of outstanding accounts receivable Aging of accounts receivable

Estimated Bad Debts Method

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Aging of Accounts Receivable1. Review the unpaid invoices in each customer’s

account.2. Classify the invoice amounts according to the

length of time the invoice has been outstanding.

3. Multiply the total amount in each age group by the applicable estimated uncollectible percentage.

4. Make a journal entry to bring the balance in Allowance for Doubtful Accounts to the amount calculated in Step 3.

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Net Credit Sales

Average Net Receivables

Receivables turnover indicates how many times receivables are “turned

over” or collected each period.

Activity RatiosActivity Ratios

Ratio Analysis

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Accounts Receivable Financing Agreements

1. Pledging2. Assigning3. Factoring

There are three basic forms of financing agreements to

obtain cash from accounts receivable.

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When a company pledges its accounts receivable, it is using these accounts as collateral for a loan, and the servicing activities remain its

responsibility.

Pledging

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When a company assigns its accounts receivable to a financial institution, it enters into a lending agreement with the institution to receive cash on

specific customer accounts.

Assignment

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When a company factors its accounts receivable, it sells individual accounts to a financial

institution (called a factor).

Factoring

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Credit Card Sales Many retail companies accept national credit cards,

such as VISA, MasterCard, American Express, and Diner’s Club.

The retailer either deposits the credit card receipts at the bank or receives an electronic transfer of funds from the credit card company.

The retailer is assessed a service charge by the credit card company.

This charge is accounted for as an operating expense.

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A note receivable is an unconditional written agreement to collect a certain

sum of money on a specific date.

Notes Receivable

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Notes receivable generally have two attributes that are not found in

accounts receivable.

Notes Receivable

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1. They are negotiable instruments, which means that they are legally transferable among parities and may be used to satisfy debts by the holders of these instruments.

2. They usually involve interest, requiring the separation of the receivable into its principal and interest components.

Notes Receivable

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IFRS vs. U.S. GAAP Same

– Cash and cash equivalents– Sales discounts– Allowance for doubtful accounts– Pledging, assignment, and factoring

Different– IFRS category loans and receivables not defined

under GAAP– IFRS allows receivables to be classified as

“available-for-sale”

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Appendix: Petty Cash

1. An employee is appointed petty cash custodian.

Petty Cash 500Cash 500